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my guess is that they're buying put options on the shiller home-price index, at a strike price 20% below the spot price. though, those indices are only granula
by findjashua 7y ago
my guess is that they're buying put options on the shiller home-price index, at a strike price 20% below the spot price.
though, those indices are only granular at the city level, whereas during a recession all neighborhoods in a city don't drop in value by the same rate - eg for bay area in 2008, east bay got decimated, whereas palo alto/peninsula barely dropped 5%.
- loftyai 7y agoYou're getting warmer ;) We also don't just hedge with options on 1 index, so a blend of hedging instruments can get us pretty close to 100% granularity. Any percentage points that are not covered in a granular manner should be offset by performing contracts, and the worst case is we use our own capital to cover maybe the remaining 1-2% uncovered risk.